Sunday, September 23, 2012

Living on Cash after Bankruptcy

Living on Cash after Bankruptcy

After bankruptcy, my life is different than it used to be in more ways than one. Gone are the days of using credit cards to fulfill whims...well, at least the whims that could be satisfied within credit limits. In the more than four years since filing bankruptcy, I've learned a lot of lessons - stuff I wish I'd learned much earlier in life. One of the most significant lessons I learned was how to live on cash only.

Of course, I had to cease using all credit cards before I even filed my Chapter 7 bankruptcy. That's just part of how it works. Not using credit cards also meant that I had to start using cash for everything, and that takes some getting used to. However, I've discovered, living on cash is a much better way to live than living in debt.

For one thing, I can't spend more than I earn, which is something many people do. If I want something I can't afford, I have to save up for it. Funny how we are taught to do that as children and then ignore that teaching once credit rears its ugly head into our lives. This is a great lesson to make sure your children learn now.

Before I go on, I need to expand on the definition of "cash only". It doesn't mean you have to carry large amounts of cash. That would be inconvenient and also dangerous. By cash only, I'm really talking about any payment methods that don't drive you into debt. They don't have any interest, and they don't have any fees. For the purposes of this premise, living on "cash only" includes the use of paper checks and debit cards. Living on cash only has more to do about living without credit than it does to do with how to live on cash.

You are probably afraid of living without credit, and that's perfectly normal. One of the biggest fears I hear from people is that they won't be able to do things like get a rental car or reserve a hotel room. That's simply not true. All you need is a debit card that doubles as a MasterCard or Visa. Most banks offer these with no credit check and no fees. If you can't get one from your bank, there are plenty of banks online to choose from.

You should build up an emergency savings fund. This may take a while to get going, and if you have an emergency before the funds are saved, there are other options. Many medical offices will allow you to split up payments if you can't afford to pay the amount upfront and in full if you agree to your payments that are set to be charged to your debit card on predetermined dates. There may even be discounts for people whose income is lower than a certain threshold. Don't be afraid to ask what your options are.

It's worth mentioning that it's unrealistic that you'll never need some sort of credit. For those of us who can't afford to buy a home or car outright, saving up for one won't be an option either. It may actually be necessary to acquire a credit card or two (no personal cash loans) to establish or re-establish credit so that you can eventually get a home loan or a car loan. Those are acceptable forms of debt as long as you can afford them and you budget for them.

If you find you do need a credit card to rebuild your credit history, the following tips are imperative:

1. Pay the balance in full each month and put the payment in your budget. This way, you will never acquire interest.

2. Don't open a credit card that has an annual fee. These types of cards usually give you a credit limit that is just over the fee, so they are virtually useless and actually harmful.

3. Pay all credit cards in full and on time. No late fees. If you must set up recurring payments to do this, then do it.

4. Don't use credit cards to pay for luxury items. Buy necessities that you would otherwise budget for. Again, pay them in full each month.

5. Open a cashback credit card or rewards card. This way, you can even earn cash back on your purchases. Why not make money on your necessary expenses?

6. Remember tips 1 - 5. You opened the credit card in order to establish credit and nothing more. As long as you follow these rules, having ONE credit card (maybe two) still counts as living on cash.

That's how to live on cash not only after bankruptcy, but also in lieu of it. When used correctly, a credit card can be a useful tool for financial health, but only when paid for with cash. The problem is that too few of us use credit correctly. The peace of mind that comes from living on cash is priceless, and I love it. I want you to experience it too.